UK shares and sterling again in spotlight on darkening retail conditions                           

Shoppers reined in spending more sharply than expected in September

Bank of England: Scheduled to deliver its next update on the British economy on November 3,

British financial markets have again come under the spotlight, as the latest retail sales figures showed the economy was facing darkening conditions.

Sterling and UK-facing shares also came under pressure on Friday as the Conservative Party contest to select the next prime minister added to uncertainty. 

Data showed British shoppers reined in their spending more sharply than expected in September as they felt the hit from rising prices. The UK's retail sales fell by over 4%.

"The pound finds itself back under pressure today as traders are faced with yet another bout of political uncertainty and economic concerns," said Joshua Mahony, senior markets analyst at IG, an online broker.  

"This morning’s retail sales data highlighted the struggles facing consumers and businesses alike, with people spending 3.9% more for 6.9% less goods." 

Stock markets "were faced with yet another bout of political uncertainty, with Penny Mordaunt officially throwing her hat into the ring for a potentially doomed two-year stint that will likely be dominated by inflation and recession", said Mr Mahony.

Max Newman, a portfolio manager at Julius Baer, said that any British company that depends on consumers "whether it's retailing or housebuilders, you've seen a very punishing share price reaction this year". 

"They're starting to reflect a recessionary environment for those companies," said Mr Newman, adding there could be more weakness in store for domestically exposed stocks. 

'Grim economic news'

Citing a new retail survey, analysts at Davy said that whoever becomes British prime minister will face "grim economic news".

"Hence, the new prime minister will still face a difficult economic outlook as the medium-term fiscal plan is announced on October 31, under pressure to find politically acceptable spending cuts to rein in borrowing," said Conall Mac Coille, chief economist at Davy, in a research note. 

Davy said that the Bank of England's next update on the British economy on November 3 "should ensure the OBR [Office of Budget Responsibility] does not succumb to any political pressure to take an overly optimistic view.

"So the pressure will be on the chancellor of the exchequer, presumably Jeremy Hunt, to find additional spending cuts to rein in borrowing," said the broker. 

The Bank of England had already forecast that the British economy will go into recession next year, with GDP contracting by 1.5%, but the economic conditions have since worsened. 

In its research note, Investec Europe said the "UK was not Ok", citing both the retail sales and debt outlook for the economy. 

"On the latter, the outlook for the UK's public finances has been the centre of the debate recently and alongside the general chaos of the last six weeks, ultimately cost Liz Truss her premiership," said the bank.

• Additional reporting Reuters